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eSports: Tech or Media?

At D2D, we approach most analysis from the point of view of technology companies. We are Bay-Area based, and interact regularly with tech companies, VCs, and the attendant tech ecosystem. This tends to color our analysis of industries – we look for ‘disruption’, ‘platforms’ and software business models.

However, it should be clear that eSports is not entirely (or at all) a ‘technology’ business. True, it is based on software running on computer hardware across some massive networks. But the mechanics of the industry – the revenue drivers, the role of the players, etc. – mean that eSports is much closer to being a media industry. This may sound like a trivial distinction, but anyone looking to invest in eSports should keep this distinction in mind, as there are some pretty serious consequences.

First, eSports is very much a human operation. The players, not the computers, are what drive outcomes, and it is the players that draw the fans. This means that management of human beings is a critical skills set for any eSpots management team. Some may argue this is true for any company, but our point here is that the operational units of revenue are human beings as opposed to some kind of software system. There is a large ‘maintenance’ side required for a successful eSports operation, and this means more than having an HR manager from industry. If you ignore your servers for a few weeks, they will not all walk out on you. Ignore a team of players for a few days, and the results can be felt very quickly.

Second, media businesses tend to be much more of a ‘treadmill’ requiring continuous input and success. Game companies are largely built to manage this treadmill – trying to establish long-lived franchises while also constantly searching for new ‘blockbusters’. This means that growth curves look very different. If you build a successful software product or app service, you can scale it quickly and efficiently. There are whole categories of people known as ‘growth managers’ (or hackers) who specialize in building that scale. By contrast, eSports is much more about ongoing investment. We suspect that this will trip up a few investment groups who are expecting initial team success to be followed by a rapid scale up of the business. Instead investors should look for longer horizons, once a team establishes a fan base, it can hold onto to that for a long time. This is an intangible barrier to entry that needs to be understood ahead of time.

Third, the reason that barrier exists is because the ‘end-user’ of eSports is the consumer viewing public. As much as revenue will come from enterprises (advertisers, broadcasters, etc.), successful eSports organizations need the fans in order to deliver on their commitments to those revenue sources. This is the area in which the sports teams and entertainment groups backing many teams have a clear advantage over ‘tech’ investors. Those organizations have deep institutional learning around building a fan base. Are there any tech company investors who can create the loyal following the New England Patriots enjoy?

This leads to our conclusion that there may never be an eSports ‘Unicorn’ or billion dollar start-up. There will be many valuable teams and billion dollar revenue streams, but it is hard to see how any single company will run to that scale, with the obvious exception of some of the game companies. This should not serve to discourage investors. There is still plenty of money to be made in eSports, but it is important to have appropriate time and valuation expectations.